Rally to Follow Correction, but Beware ‘Repeat Disaster: Nomura
Despite Monday's sharp pullback, risk can rally further in the medium term and the S&P500 could break through 2007 record levels, Nomura Strategist Bob Janjuah said on Tuesday.
"I continue to believe that the S&P500 can trade up towards the 1575/1550 area, where we have, so far, a grand double top. I would not be surprised to see the S&P trade marginally through the 2007 all-time nominal high," Janjuah said. The S&P closed at 1,495 points on Monday.
On October 9, 2007 the S&P hit an all-time high of 1,565. Recent weeks have seen the index buoyed by a dissipating euro zone crisis and the resolution of the fiscal cliff in an eleventh hour deal , although Monday brought sharp losses to all three major U.S. indexes.
This month, however, a correction is due, he said. He expects it to take the S&P500 down by 5 percent or so (from 1,515 to 1,440ish) over the first few weeks of February. But by the end of February and into March, the rally will resume, he said.
"Tactically, over the next quarter or two, I expect to see one or two (at least) 5 percent to 10 percent dips or corrections ((there are after all many banana skins ahead in terms of politics, policy, and economic fundamentals), but which I think will be short lived," Janjuah said in a note to clients. Janjuah warned however that investors must not ignore the"flashing warning signs".
Janjuah is a well-known bear and has been scathing about the reaction and solutions of policymakers around the world to the financial crisis.
(Read more: Markets to Spike 'One Last' Time)
"In the run up to the 2000 and 2007 highs, before the significant collapses that followed in the subsequent 18/24 months, markets seemed infatuated in Greenspan and his famous 'Put'… , investor complacency was off the charts, volatility was at record lows, belief in 'the system' was sky high, and positioning was at extremes," Janjuah said.
Time – the next 18/24 months – would provide the answer as to whether we are witnessing a "repeat disaster in the making", he said.
A "weekly close at a new all-time high would I think lead to the final parabolic spike up which creates the kind of positioning extreme and leverage extreme needed to create the conditions for a 25 percent to 50 percent collapse in equities over the rest of 2013 and 2014," Janjuah said.
(Read more: Unlikely Market Scenarios Could Spring on Us in 2013)
He said that the sharp falls would be a driven by the "real economic reality hitting home and by policymaker failure/loss of faith in'their system'."
By CNBC's Shai Ahmed; Follow her on Twitter @shaicnbc